1. Copyright © 2004 South-Western 28 Unemployment and Its Natural Rate

2. Copyright © 2004 South-Western IDENTIFYING UNEMPLOYMENT Categories of Unemployment The problem of unemployment is usually divided into two categories. The long-run problem and the short-run problem: The natural rate of unemployment The cyclical rate of unemployment

3. Copyright © 2004 South-Western IDENTIFYING UNEMPLOYMENT Natural Rate of Unemployment The natural rate of unemployment is unemployment that does not go away on its own even in the long run. It is the amount of unemployment that the economy normally experiences.

4. Copyright © 2004 South-Western IDENTIFYING UNEMPLOYMENT Cyclical Unemployment Cyclical unemployment refers to the year-to-year fluctuations in unemployment around its natural rate. It is associated with short-term ups and downs of the business cycle. E.g. fruit pickers E.g. resort workers

5. Copyright © 2004 South-Western IDENTIFYING UNEMPLOYMENT Describing Unemployment Three Basic Questions: How does government measure the economy’s rate of unemployment? What problems arise in interpreting the unemployment data? How long are the unemployed typically without work?

6. Copyright © 2004 South-Western How Is Unemployment Measured? Unemployment is measured by the Bureau of Labor Statistics (BLS). It surveys 60,000 randomly selected households every month. The survey is called the Current Population Survey.

7. Copyright © 2004 South-Western How Is Unemployment Measured? Based on the answers to the survey questions, the BLS places each adult into one of three categories: Employed Unemployed Not in the labor force

8. Copyright © 2004 South-Western How Is Unemployment Measured? The BLS considers a person an adult if he or she is over 16 years old.

9. Copyright © 2004 South-Western How Is Unemployment Measured? A person is considered employed if he or she has spent most of the previous week working at a paid job. Worked in their own business, or worked as an unpaid workers in a family member’s business. Full-time and part-time workers are counted

10. Copyright © 2004 South-Western How Is Unemployment Measured? A person is unemployed if he or she is available for work and tried to find work within the past 4 weeks. Also includes those who were waiting for the start date of a new job. And temporary layoff

11. Copyright © 2004 South-Western How Is Unemployment Measured? A person who fits neither of these categories, such as a full-time student, homemaker, or retiree, is not in the labor force.

12. Copyright © 2004 South-Western How Is Unemployment Measured? Labor Force The labor force is the total number of workers, including both the employed and the unemployed. The BLS defines the labor force as the sum of the employed and the unemployed.

13. Figure 1 The Breakdown of the Population in 2001 Copyright©2003 Southwestern/Thomson Learning Adult Population (211.9 million) Labor Force (141.8 million) Employed (135.1 million) Not in labor force (70.1 million) Unemployed (6.7 million)

14. Copyright © 2004 South-Western How Is Unemployment Measured? The unemployment rate is calculated as the percentage of the labor force that is unemployed.

15. Copyright © 2004 South-Western The labor-force participation rate is the percentage of the adult population that is in the labor force. How Is Unemployment Measured?

16. Copyright © 2004 South-Western Does the Unemployment Rate Measure What We Want It To? It is difficult to distinguish between a person who is unemployed and a person who is not in the labor force. People move in and out of the labor force so often, making it difficult to interpret. New entrants: 1- New college graduates looking for a job 2- Old workers who left the force and got back

17. Copyright © 2004 South-Western Does the Unemployment Rate Measure What We Want It To? Unemployed people might not actually be trying so hard to find a job Other people may claim to be unemployed in order to receive financial assistance, even though they aren’t looking for work. Discouraged workers, people who would like to work but have given up looking for jobs after an unsuccessful search, don’t show up in unemployment statistics.

18. Copyright © 2004 South-Western How Long Are the Unemployed without Work? To judge if the problem is serious or not, we should consider whether unemployment is short-term or long-term Short term within weeks Long term within months

19. Copyright © 2004 South-Western How Long Are the Unemployed without Work? Most spells of unemployment are short. Most unemployment observed at any given time is long-term. Most of the economy’s unemployment problem is attributable to relatively few workers who are jobless for long periods of time.

20. Copyright © 2004 South-Western Why Are There Always Some People Unemployed? In an ideal labor market, wages would adjust to balance the supply and demand for labor, ensuring that all workers would be fully employed. The reality is different, there are some workers without jobs even if the economy is doing well. Employment is never zero

21. Copyright © 2004 South-Western Why Are There Always Some People Unemployed? Frictional unemployment refers to the unemployment that results from the time that it takes to match workers with jobs. In other words, it takes time for workers to search for the jobs that are best suit their tastes and skills. Explain relatively short spells of unemployment

22. Copyright © 2004 South-Western Why Are There Always Some People Unemployed? Structural unemployment is the unemployment that results because the number of jobs available in some labor markets is insufficient to provide a job for everyone who wants one.

23. Copyright © 2004 South-Western JOB SEARCH Job search The process by which workers find appropriate jobs given their tastes and skills. Results from the fact that it takes time for qualified individuals to be matched with appropriate jobs.

24. Copyright © 2004 South-Western JOB SEARCH This unemployment is different from the other types of unemployment. It is not caused by a wage rate higher than equilibrium. It is caused by the time spent searching for the “right” job.

25. Copyright © 2004 South-Western Why Some Frictional Unemployment is Inevitable Frictional unemployment is often the result of changes in the demand for labor. E.g. oil vs. cars Changes in the composition of demand among industries or regions are called sectoral shifts. It takes time for workers to search for and find jobs in new sectors. Frictional unemployment is inevitable because the economy is always changing. E.g. wool vs. cars

26. Copyright © 2004 South-Western Public Policy and Job Search Government programs can affect the time it takes unemployed workers to find new jobs, thus reducing the natural rate of unemployment. These programs include the following: Government-run employment agencies Public training programs Unemployment insurance

27. Copyright © 2004 South-Western Public Policy and Job Search Government-run employment agencies give out information about job vacancies in order to match workers and jobs more quickly.

28. Copyright © 2004 South-Western Public Policy and Job Search Public training programs aim to ease the transition of workers from declining to growing industries and to help disadvantaged groups escape poverty. E.g. prince Mohammad bin Fahad program for youth development

29. Copyright © 2004 South-Western Public Policy and Job Search Unemployment insurance is a government program that partially protects workers’ incomes when they become unemployed. Excludes: employees who just joined the labor force, were fired for a cause or quit their jobs. Offers workers partial protection against job losses. Offers partial payment of former wages for a limited time to those who are laid off.

30. Copyright © 2004 South-Western Public Policy and Job Search Unemployment insurance increases the amount of search unemployment. It reduces the search efforts of the unemployed. Advantage: achieves its primary goal of reducing the income uncertainty that workers face. Advantage: it may improve the chances of workers being matched with the right jobs.

31. Copyright © 2004 South-Western Public Policy and Job Search The unemployment rate is an imperfect measure of a nation’s overall level of economic well-being. Most economists agree that eliminating unemployment insurance would reduce the amount of unemployment Economists disagree on whether economic well-being would be enhanced or diminished by this change in policy.

32. Copyright © 2004 South-Western Public Policy and Job Search Structural unemployment occurs when the quantity of labor supplied exceeds the quantity demanded. Structural unemployment is often thought to explain longer spells of unemployment.

33. Copyright © 2004 South-Western MINIMUM-WAGE LAWS Why is there Structural Unemployment? Minimum-wage laws Unions Efficiency wages

34. Copyright © 2004 South-Western MINIMUM-WAGE LAWS When the minimum wage is set above the level that balances supply and demand, it creates unemployment.

35. Figure 4 Unemployment from a Wage Above the Equilibrium Level Copyright©2003 Southwestern/Thomson Learning Quantity of Labor 0 Surplus of labor = Unemployment Labor supply Labor demand Wage Minimum wage LDLD LSLS WEWE LELE

36. Copyright © 2004 South-Western MINIMUM-WAGE LAWS Most workers have wages above the legal minimum The law does not prevent the wage from adjusting to balance supply and demand These laws matter to the least skilled and least experienced members.

37. Copyright © 2004 South-Western UNIONS AND COLLECTIVE BARGAINING A union is a worker association that bargains with employers over wages and working conditions. In the 1940s and 1950s, when unions were at their peak, about a third of the U.S. labor force was unionized. A union is a type of cartel attempting to exert its market power.

38. Copyright © 2004 South-Western UNIONS AND COLLECTIVE BARGAINING Workers in a union discuss the job benefits as a group. The process by which unions and firms agree on the terms of employment is called collective bargaining.

39. Copyright © 2004 South-Western UNIONS AND COLLECTIVE BARGAINING A strike will be organized if the union and the firm cannot reach an agreement. A strike refers to when the union organizes a withdrawal of labor from the firm.

40. Copyright © 2004 South-Western UNIONS AND COLLECTIVE BARGAINING A strike makes some workers better off and other workers worse off. Workers in unions (insiders) reap the benefits of collective bargaining, while workers not in the union (outsiders) bear some of the costs.

41. Copyright © 2004 South-Western UNIONS AND COLLECTIVE BARGAINING By acting as a cartel with ability to strike or otherwise impose high costs on employers, unions usually achieve above-equilibrium wages for their members. it raises the labor supply and reduces the labor demand = unemployment Union workers earn 10 to 20 percent more than nonunion workers.